Now that deal is in tatters. Xiyang says that the North Korean government sabotaged its $40 million investment, allowing the company to stay just long enough to steal its knowledge, then seizing the iron ore mine and sending armed guards to evict Chinese workers. And recent sniping over the failed venture has exposed the often testy relationship between China and North Korea that, in public, remains hidden beneath vows of friendship.
The business spat came into the open last month when Xiyang posted a gritty, salacious blog item describing what the company called its “nightmare” in running the mine. It included details of high living by the North Korean managers when they visited China, where they were said to have demanded female escorts, expensive alcohol and cars.
In a follow-up blog post this month, Wu Xisheng, the deputy general manager of Xiyang, demanded that North Korea stop its “illegal activities” at the mine and pay $31.2 million in compensation.
“We think they don’t have that much money,” he said in a recent interview, adding that his company had been negotiating for months with the state-run North Korean company for the compensation.
To the surprise of many, North Korea responded to Xiyang’s accusations with some of its own, despite its heavy dependence on Chinese aid and the investment of Chinese companies. The Beijing office of the Joint Venture and Investment Committee of North Korea posted a note on its Web site saying that Xiyang had failed to provide up to half of the investment it promised even after several years, and that many laws and regulations had been passed to provide more legal protection for foreign investors.
An interview request with a manager at the investment office seeking more of North Korea’s side in the dispute was declined.
The very public clash comes amid anticipation that the new leader of North Korea, Kim Jong-un, will open, even slightly, one of the world’s last Communist redoubts.
To stand a chance of real economic advancement, analysts say, he would need continuing support from China. About two-thirds of the 305 foreign investments in North Korea are Chinese, according to a list published by the Open Source Center, a United States government intelligence organization that analyzes publicly available material. Japan comes next with 15 investments, according to the list.
By all accounts, Beijing has been encouraging Mr. Kim to introduce economic reform along the lines of the China model begun by Deng Xiaoping more than three decades ago.
But analysts say they expect China to help only so much. North Korea’s greatest value to China, Chinese academics say, is as a buffer against the possibility of a united Korean Peninsula that could become an American ally. So while China would like the North Korean government to liberalize its economy to stave off a collapse, which would result in a flood of refugees into China, there is little appetite for North Korea to become too successful, lest it sever its dependence on China.
Already, both sides appear to have been disappointed.
Piao Guanjie, a researcher at the China Academy of Social Sciences, said the North Koreans often demand that China send its state-owned enterprises to open plants in North Korea, but the Chinese government always refuses.
“There is a big discrepancy between what North Korea expects and what China will do,” she said.
At the same time, Mr. Kim seems to be going his own way, ignoring much of China’s advice. Chinese academics say that Chinese officials have suggested that Mr. Kim modify his all-out spending on the military. That has not happened. A parliamentary session last month ended without a hoped-for announcement of large-scale agricultural reforms to ease grim food shortages, though defectors’ groups report that pilot programs have begun under Mr. Kim.
Mr. Kim has also, in some ways, proved a tough sell, raising concerns about a linchpin of trade between the two countries: the mining of minerals that feeds China’s need for raw materials and North Korea’s desperate need for hard cash.
Unlike his father, Mr. Kim has complained that North Korea’s resources, one of its few sources of outside income, are being sold off too cheaply, according to Chinese news media reports, and is demanding higher prices for its iron ore. That does not sit well with the bargain-conscious Chinese mine operators. (Mr. Wu, the Xiyang deputy general manager, said iron powder that costs about $60 a ton to produce in China costs only about $30 a ton to produce in North Korea.)
“The North Korean planned economy has an insatiable appetite for investment, and in the last couple of years, China and North Korea joint deals have increased in minerals, rare earths, coal,” said Daniel Pinkston, the Northeast Asia deputy project director for the International Crisis Group in Seoul, South Korea. But the need for foreign investment does not mean any relaxation of the strict state-run economy, in which the means of production belong to the state, he said.
That Xiyang risked North Korea was noteworthy. The company’s chairman, Zhou Furen, is cited by Forbes magazine as being among the 100 richest men in China.
Mr. Zhou, who is well connected in China, said in 2007 when he started the mine project that he knew there had been problems for Chinese firms in North Korea.
But, as Mr. Wu said, “The resources are plentiful, North Korea has tax incentives, it was a perfect situation.”
Mr. Zhou was also confident he could overcome obstacles by establishing direct relations with the government, including the leader at the time, Kim Jong-il, the current leader’s father.
Those top-tier connections were never made. The mine opened in April 2011 and began a process known as mineral dressing that separates commercially valuable minerals from their ores. After four months, Mr. Wu said, the North Koreans had mastered the technique, and began to oust the Chinese.
In September 2011, North Korea “tore up the contract,” Mr. Wu said, and demanded new conditions, including that the iron powder would not be sold. The North Koreans apparently wanted to sell the powder themselves, he said. With almost no access for outsiders into North Korea’s tightly controlled police state, it is impossible to know the terms of the original agreement.
Even in better times, working at the mine was difficult, Mr. Wu said. As a foreigner, he was not allowed to enter a government office. If he wanted to leave the mine, he had to ask permission and was then accompanied by two security officers. “We were watched 24 hours a day,” he said. The 700 North Korean workers were supposed to be fed by the government. But he said that most days the men were too weak to work after just two hours, forcing the Chinese to stop work and dole out rice.
Xiyang is the biggest Chinese investment to face trouble in North Korea, but not the only one.
In 2007, the Wanxiang Group, a conglomerate that makes auto parts, established a partnership with North Korea to develop a large copper mine, known as the Hyesan Youth copper mine, according to accounts in the Chinese news media.
After two years, the North Korean partner announced it was taking full ownership. In that case, the chairman of Wanxiang prevailed on China’s prime minister, Wen Jiabao, to persuade the North Koreans to back off.
Mr. Wu of Xiyang, however, imagines that riches from the mine that his company worked on are already being sold off, probably to other Chinese companies.
“The technology is easy,” he said. “They’ve already learned it.”